Cryptocurrency investors breathed a sigh of relief this Friday. The broader market was up 15%. The best known, the bitcoin, it bounced 3% after a week of drops. In the last five days, 10.85% has been left. The ethereum, the other big ‘crypto’ almost 20%. And so all crypto assets. It has been a sell-off week that has coincided with what has been the worst week in stock markets since 2008.
The beginning of the ‘run’ was caused by Luna, a Terra token that has left almost 100% of its value. The reason? Hard to tell though there are those who speak of a speculative attack. But why is Luna so important? Basically because it is the mechanism that served to maintain the stability of UST, a stablecoin linked to the dollar and that this week lost its parity. Luna and UST form the Terra ecosystem.
The plummeting fall of the token has also put UST in check, dragging it to values that had never been seen before. We are talking about how it has gone from being worth 1 dollar to less than 50 cents.
Although it is true that Luna has been the trigger, the context surrounding cryptocurrencies cannot be separated from everything that has happened. We are talking about assets that do not have the backing of central banks, and that in recent months have made it clear that its evolution is more linked to that of world stock markets (especially the Nasdaq) than its own listing model.
To show a button. The losses of the ‘crypto’ market this week have come hand in hand with what has been worst week since 2008 for world stocks. Therefore, the theory that speaks of the relationship between what was called to be a new haven asset and traditional markets gains strength.
As if that were not enough, the bad macroeconomic data does not help. High inflation in the United States and the European Union is causing a tightening of monetary policies. We have already seen rate hikes on the other side of the Atlantic, in England the Central Bank has also done the same and the European Central Bank is laying the groundwork for a hike in July.
This new scenario has caused a rising sovereign bond yields and, therefore, a transfer of some investors towards those safer assets and backed by central organizations under the umbrella of Fiat money.
A perfect cocktail that is accompanied by the crisis of Coinbase. The platform has presented this week worse than expected results. Its CEO recognized that, if there are problems, investors could have difficulties when it comes to recovering your money invested in cryptocurrencies. So yet another reason why many have chosen this week to retract sails.
1/ There is some noise about a disclosure we made in our 10Q today about how we hold crypto assets. Tl;dr: Your funds are safe at Coinbase, just as they’ve always been.
— Brian Armstrong – barmstrong.eth (@brian_armstrong) May 11, 2022
Now the key is to see how long this situation can last. Some analysts like those of GlobalBlock they wonder “if there is hope that the worst is over”, especially if you look with the high beams and not with the low ones.
At the moment there is still a market. Right now the capitalization of cryptocurrencies reaches 1.2 trillion dollars according to the portal coinmarketcap.com. Now, the question that many are now asking is how long this investment market will be able to remain unregulated.
All those who invested in Terra or Luna have lost their profits this week. There are many countries that have already focused on crypto assets. In the United States there is already talk of the need to regulate stablecoins, and to seek protection for those who invest in cryptocurrencies in general. Not to mention how the FED is studying how to launch a digital dollar.
The same happens with the European Central Bank, which is already studying whether it is feasible -or not- to launch a digital euro that serves as a payment formula, but also as an investment. That is, a direct competition to crypto assets.
In fact, this very week the governor of the Bank of Spain, Pablo Hernandez de Kos, has made an urgent call to quickly regulate decentralized finance and cryptocurrencies to “avoid risks of financial instability”. He has also called banks to be cautious in the face of the temptations they may have to incorporate crypto assets into their balance sheets to offer their clients a new investment formula.
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